World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Friday, August 7, 2009

Today is all about the employment report which came in with a headline of “only” 247,000 for the month of July while the rate dropped from 9.5 to 9.4%. Here’s how the equity futures reacted:

The dollar was up and bonds were down sharply on the release.

In a nutshell, keep in mind that this current economic crisis has been going on for so long that there are now many people dropping off the back side of being counted. The consumer is still burdened with debt and more and more people are losing their incomes. Talk of employment growth is simply premature. The higher stocks go without real earnings and without clearing the debts from consumers, the higher price to earnings ratios will go. It is ultimately earnings that underpin the equity markets and the price of stocks has NEVER been so high compared to earnings.

It would take one heck of a lot of growth to pull P/E’s back into a normal historic range, and the only reason they look as “good” as they do is because the financial industry was allowed to go back and mark their assets to fantasy – otherwise the large banks are still insolvent and would not have earned a nickel.

HighlightsJob losses came in much lower than expected and point to being at or near the end of recession. Nonfarm payroll employment in July shrank 247,000, following a revised decline of 443,000 in June and a revised drop of 303,000 in May. The July drop in jobs was not as severe as the consensus forecast for a 300,000 decrease. June and May revisions were up a net 43,000. The easing in job losses was seen in both goods-producing and service-providing sectors.

From the household survey, the civilian unemployment rate unexpectedly slipped to 9.4 percent from 9.5 percent in June and was below than the consensus projection for 9.7 percent. The decline was due to a sizeable drop in the labor force.

Wage inflation returned more to normal in July as average hourly earnings rose 0.2 percent after no change June. The latest gain matched the consensus forecast for a 0.2 percent rise. The average workweek edged up to 33.1 hours from 33.0 hours in June.

Today's report is very good news for equity markets. Job losses are getting smaller and the unemployment rate actually slipped. Without a doubt, the July numbers should be a big psychological boost for equities. Meanwhile, bond prices are down.

Keep in mind where the BLS’s data falls within the spectrum of reliability – here’s how Chris Martenson put it:

Into the final bucket goes the utterly unreliable 'data,' so bad that I need to use quotes around it. This 'data' is modeled or otherwise manufactured out of thin air with no accountability, does not square up (at all) with good sources of data, has massive errors in methodology that have never been explained, consists of survey data for reasons covered in an earlier Martenson Report (Survey Says...), is self-referential (e.g. LEI or 'leading indicator' data), and/or has been proven repeatedly in the past to be consistently biased for political or self-serving gain.

Okay, now that we know we’re talking about massaged numbers that are derived from sampling and processed in a myriad of ways to arrive at a guess. And if that were done consistently, at least we could derive a trend, but that’s not the case either, especially over the long run.

Now, let’s look at the breakout of categories within this report to see where the jobs are being lost and created:

Areas in red are areas that lost jobs while the green are areas that gained jobs. What you’ll notice is that almost all the job gains are still in the government sector while all the losses are in the private sector. This is the trend and has been for quite some time. Of course it requires private sector money to pay for those in the government and you can see that our economy is getting stilted further and further out of balance with BIG government being the understatement of the century.

In deriving the reported numbers, the BLS does provide some of the raw numbers in each step of the “cooking” process. The number from the table that most closely resembles how data was presented in the past is the U6 number:

The numbers presented to the public are the U3 numbers. You can see that it was only with seasonal adjustments that both the U3 and U6 rate improved and that without seasonal adjustments the rate was steady.

The numbers, as presented by the BLS, are trending to a slower rate of job loss. Again, the people who are not tracked, like part time employees who would work full time, those “discouraged workers” who have just given up. And then there are those who the BLS just creates out of thin air using their “birth/death” model (Mish does a good job of covering that aspect and I’m sure he’ll have the breakout later).

So, has employment turned an actual corner or is it just a statistical blip combined with distortion? For me it’s too difficult to tell, the other more reliable data, like tax revenue and shipping numbers, do not support this report and thus we need to see if the trend of falling numbers can be maintained.

From a technical perspective, probably the most bearish thing that could happen is that the markets spike this morning and then close down later today or even on Monday. Rallies often END on “Good” news, and we are now up against heavy resistance, extremely overbought, and McHugh’s wave count suggests we are finishing wave 1 up of c up.

Another technical possibility is that we are forming a big rising bearish wedge. Everyone is focused on the “V” or the inverse H&S pattern, but check out the rising wedge. On the SPX we may be overthrowing the top of the wedge now, but it’s even better formed on some of the other indices like the Transports: